Nike takes its name from the Greek goddess of victory and it’s easy to see how important “victory” is to their ethos and company position. They are the undisputed global leader in sports apparel and footwear, a position reinforced by constant innovation and brand building. Headquartered in Oregon, USA, its brands include the eponymous Nike, Jordan and the casual footwear range, Converse, which was acquired in 2003. Nike is the world’s largest manufacturer and distributor of sporting footwear, apparel and equipment.
Nike’s supply chain was hit by the pandemic when production in Vietnam, where the company sources over 40% of products (including 50% of footwear) was severely disrupted. In the second half of 2021, these supply chain issues were particularly pronounced. There was an estimated loss of around 10 weeks of inventory due to shutdowns. Production now appears to be returning to capacity in Vietnamese factories and any issues are being viewed as transitory.
Covid-19 has also impacted retail sales in China where Nike derives around a fifth of group revenue, though underlying demand remains strong. Nike has switched its distribution strategy in recent years to focus more on selling direct to the customer and less through wholesalers. Nike Digital on-line sales have increased five-fold over the past five years, driven by North America.
Nike invests heavily in product innovation and brand equity, including sponsorship of elite athletes across a range of sports (most recently US Open tennis champion, Emma Radacanu), backed up by fitness training phone apps and podcasts. With increased consumer awareness of the benefits of exercise for both physical and mental health of health, they are likely to emerge as a post-pandemic winner in the consumer discretionary space.
Nike announced Q2 results in late December that reflected the impact of the supply chain issue. Revenues were flat year-on-year, although gross margin improved to 45.9%. These increases were boosted by lower inventory resulting in less discounting, offsetting rising freight costs. Nike Direct continues to drive growth with revenues up 9% and direct-to-consumer sales representing 40% of group total in Q2. Nike Digital grew sales by 12% driven by 40% growth in North America as the pandemic accelerated the trend of shoppers purchasing on-line. The Converse sneakers brand outperformed Nike in Q2, with sales up 16% on strong demand from North America and Europe. There was a weaker performance in China, with sales down 20%, this was offset by 12% growth in Nike’s largest market, North America.
In recent years Nike has traded on a significant premium to the broader US equity market, currently around 35X for the current year, double the multiple of the S&P 500. Despite the strong Q2 results Nike has underperformed in the market post results and this Price to Earnings multiple has compressed slightly, having been closer to 50X at peak. This multiple is largely based on the expectation that Nike can deliver mid-teens earnings growth going forward over several years. Whilst Nike yields just under 1%, it is committed to a progressive dividend policy and has increased its dividend consecutively for the past twenty years. There is also an active share buyback policy and in June 2018 management committed to a four-year buyback program for $15bn of shares, which to date has repurchased $6.4bn of stock.
The Future for Nike:
While no stranger to controversy with past allegations of child labour and sweatshops, Nike is an industry leader in sustainability and in 2021 announced their ambitious 2025 Purpose Targets, focusing on enhancing their ESG profile in areas like carbon reduction, workplace diversity and community involvement. In a move no doubt to coincide with the focus on Nike Direct, in February 2021, Nike acquired Datalogue, a New-York based digital sales and machine learning technology company. This emphasis on Nike Direct, which by-passes the traditionally dominant wholesaler route for distribution, should enhance margins and give Nike a deeper relationship with customers. The direct-to-consumer route takes both the form of Nike owned stores and Nike Brand Digital, where online sales are growing at double-digit rates and are over 20% of group revenues. Nike has market leadership in China as well as North America and 2022 could be a year of recovery in the former as supply chain issues ease.
Nike’s recent share price weakness on broader macro and geopolitical concerns, represents a rare buying opportunity in our opinion in this global leader in the sportswear and leisure industry.
James Buckley is a Senior Equity Research Analyst with Cantor Fitzgerald Ireland.
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